India

Taxing again

SURRENDER can be costly. After yielding to demands for higher pay by 5.3m government workers, India's finance minister, Palaniappan Chidambaram, announced on September 16th an emergency revenue-raising package. It includes higher duty on all imports, except petroleum, and doubling the tax on foreign air travel.

This is a reversal of the process begun by Mr Chidambaram in his budget in February, when he slashed tax rates and said he aimed to get Indian tariffs down to levels prevailing in the Association of South-East Asian Nations (ASEAN) by 2000. There was a long way go: he began with maximum import duties of up to 40%, and an average weighted tariff of around 26%—virtually double ASEAN's rates.

Others, however, see the picture differently. They argue that, by raising duties, Mr Chidambaram has avoided the soft option of widening the government's deficit in order to pay for the wage increases. Indeed, Mr Chidambaram says that he still aims to reduce tariffs to ASEAN's levels by 2000. The optimists also say that the wage increase has given a new political impetus to the sale of shareholdings in state-owned businesses, which could now reach 80 billion rupees ($2.2 billion), against a budgeted 48 billion rupees. Although the government will still have a controlling 51% stake in state firms, it is moving closer to the day when it may at last let go.

But this view is too kind. The finance minister's move is clearly aimed at pacifying left-wingers in the ruling coalition, who have complained of reckless liberalisation. It also pacifies businessmen who claim they are being crucified by a strong rupee.

Admittedly, the government was in a bind. It appoints a commission once in ten years to revise the salaries and working conditions of its employees. This year, the commission recommended a substantial wage increase amounting to some 110 billion rupees, but also decided to slash the size of the bureaucracy by 30% in stages: some 350,000 posts currently vacant would be immediately abolished, overtime would cease, the working week would increase from five to six days, and casual leave would be cut from 12 days a year to eight. When the unions screamed in protest, the government sought to pacify them by offering an additional 20 billion rupees a year in wages, and not abolishing overtime. The unions insisted on more, and threatened a general strike.

Mr Chidambaram wanted to resist their demands. But, with the ruling coalition bristling with former union leaders, he found himself isolated. Eventually, the cabinet decided to hand out another 50 billion rupees in pay and arrears, and to give up the plan to abolish the 350,000 vacant posts and reduce casual leave. Never before have government workers won such a comprehensive victory.

This means there is now no hope of the government embarking on the reforms that are so badly needed to change India's rigid labour laws, which make it virtually impossible to sack workers or close uneconomic factories. Rival businessmen in most Asian countries have no such disadvantage. That is why India may never roar like an East Asian tiger, though perhaps its unions will.